Expected growth rate of a stock
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IBM just paid (t=0) a $2.00 dividend. The required rate of return for IBM stock is 22%. If a price of a share of IBM is expected to be $82.1516 at the end of year 2 (t=2), what is IBM's expected growth rate?
possible answers:
a)16% b)11% c)11.5% d)18% e)10.5%
f)14.5% g)16.5% h)12% i)22.5% j)13.5%
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Solution Summary
The solution calculates expected growth rate of a stock given required rate of return, price and dividendusing dividend discount model.
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Answer: d)18%
D0 = $2.00
D1 = 2(1+g)
D2 = 2(1+g)^2
D3 = 2(1+g)^3
P2= ...
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